The Ministry of Finance has a diamond eye – Newspaper Kommersant No. 230 (7431) of 12/12/2022

The government of the Russian Federation continues the practice of unscheduled increases in taxes on the raw materials industries – this time it was decided to temporarily increase the severance tax for ALROSA’s diamond mining. The additional tax in the first quarter of 2023, according to the statements of the Ministry of Finance, should amount to 19 billion rubles, of which almost half will go to the federal budget, while previously 100% of the MET went to the budget of Yakutia. According to analysts, the statements of the Ministry of Finance can also be interpreted in such a way that 19 billion rubles are revenues only to the federal budget, and the entire increase in the severance tax will then amount to 41 billion rubles. In this case, the company, apparently, will not pay dividends for 2022.

The payment of ALROSA’s dividends for 2022 is in doubt after the government’s decision to raise the severance tax in the first quarter of this year, industry analysts say. The Ministry of Finance announced on December 9 that it was preparing amendments to the Tax Code, which would allow ALROSA to increase the tax on the extraction of natural diamonds by 19 billion rubles in the first quarter of 2023. The amendment applies only to ALROSA, since its effect is limited to companies in which the Russian Federation has at least 33% (as in ALROSA). In addition to the state, the shareholders of the diamond company are the authorities of Yakutia (25%), 8% are owned by the administrations of eight districts of Yakutia, 33.9% are in free float. The increase in the tax burden will not affect AGD Diamonds, which controls about 10% of Russian diamond production.

At the same time, the Budget Committee of the State Duma approved amendments that would centralize 46% of the mineral extraction tax on diamonds in the federal budget from March 10 to May 10, 2023, while previously all 100% of this tax went to the regions.

ALROSA traditionally spends about 8% of its revenue on MET payments.

Starting from 2021, the tax is calculated on the basis of actual sales prices, and not on the price list of the Ministry of Finance, which leads to an increase in the tax burden. Now ALROSA does not publish reports.

This is not the first government decision to increase the tax burden on the extractive industries. In October, a law was passed on additional withdrawals from Gazprom through the mineral extraction tax for a total of 1.8 trillion rubles. in 2023-2025, while the company has already paid 1.2 trillion rubles. additional MET in 2022. From January 1 to March 31, 2023, the MET rates for anthracite, coking coal and thermal coal will increase. In addition, it was planned to impose a duty on coal exports, but the Ministry of Finance decided to postpone this measure.

Sinara Investment Bank believes that a scenario that is negative for minority shareholders has materialized, in which, instead of dividends for 2022, the company will have to pay a one-time additional MET, as was the case with Gazprom. Bank analysts calculated that 19 billion rubles. additional MET is about 30-40% of the free cash flow (FCF) of the company in 2022, which seriously reduces the base for paying dividends in the future.

Based on the statements of the Ministry of Finance and the State Duma, several scenarios for the development of events are possible, analysts of My Investments write. First, if 19 billion rubles is the entire amount of a one-time increase in the MET, then in this case the effect will be moderately negative. If 19 billion rubles is a tax that will be directed only to the federal budget, then a one-time increase in the severance tax could amount to 41 billion rubles. “According to our estimates, ALROSA’s FCF for 2022 will amount to RUB 58 billion. With the payment of 100% FCF in the form of dividends, the federal budget (the government of the Russian Federation owns 33% of the shares) would receive 19 billion rubles, and the government of Yakutia (25% of the shares) and uluses (8% of the shares) would receive another 14.5 billion rubles. and 4.5 billion rubles. accordingly,” they write.

The announced increase in the MET means a twofold increase in the tax burden

Boris Sinitsyn of Renaissance Capital says the additional severance tax will essentially increase the effective tax rate from 8% to 14-15%, which is higher than Norilsk Nickel’s gold and metals. “From a financial point of view, for the company, this temporary expense is currently quite affordable due to the traditionally high profitability and low leverage. However, for stock market participants, uncertainty about future tax changes may increase, especially since there were similar precedents in the oil and gas sector,” he comments.

Evgeny Zainullin